By Charles Stein
(Bloomberg) — U.S. stock mutual funds with the biggest losses in the past 10 years, a list topped by Fidelity Growth Strategies and Vanguard U.S. Growth, were crushed by the market sell-off at the start of the decade and never recovered.
The Fidelity (FDEGX) fund fell 67 percent and Vanguard's lost 50 percent, according to data from Morningstar Inc. (MORN) The 10 worst-performing diversified funds that still manage at least $1 billion tumbled an average of 43 percent in the decade through Dec. 28, about five times the decline of the Standard & Poor's 500 Index, a benchmark for the biggest U.S. stocks.
The group's performance underscores the lasting damage from the March 2000 to October 2002 bear market that followed the collapse of Internet stocks. Fidelity Growth Strategies, which oversees $1.93 billion, hadn't recouped the 86 percent loss incurred during the technology bust when stocks started falling again in October 2007 amid the onset of the housing crisis.
"A lot of funds and fund companies suffered mightily and haven't come back," Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, said in a telephone interview.
The 10 worst funds all focused on shares of growth companies, so designated because their sales or earnings are rising faster than their industry's or the overall market. The group fell 71 percent on average after the technology bubble deflated. That compared with the 47 percent decline by the S&P 500 index from March 24, 2000, to Oct. 9, 2002.
A bear market is typically defined as a decline of at least 20 percent from peak to trough.
Differing Reactions The Internet debacle didn't dampen investor enthusiasm for stocks. Equity mutual funds attracted $166 billion in 2003, roughly four times the cash that flowed into bond funds, data from Chicago-based Morningstar show.
Investors shunned stocks in favor of bonds following the second bear market of the decade, when the S&P 500 index fell 55 percent from Oct. 9, 2007, to March 9, 2009. The 10 worst funds dropped 51 percent in that period, according to data compiled by Bloomberg.
Bond funds attracted $329 billion in the first 11 months of 2009, compared with $3 billion for stocks funds, Morningstar found.
"The enormity of the disaster in 2008 turned people off to equities," said Burton Greenwald, an independent fund consultant based in Philadelphia.
Job Cuts, Takeovers Mutual-fund companies, including Fidelity, Los Angeles-based Capital Group Cos. and Boston-based Putnam Investments, eliminated jobs as assets under management shrank in 2008 and early 2009.
The slump also triggered consolidation among money managers. Invesco Ltd., based in Atlanta, agreed to buy Morgan Stanley's investment-management business in October. Minneapolis-based Ameriprise Financial Inc. said in September it would acquire the Columbia stock and bond funds from Charlotte, North Carolina-based Bank of America Corp. In June, New York-based BlackRock Inc. agreed to buy Barclays Global Investors from Barclays Plc in London.
Fidelity Growth Strategies had a portfolio "clustered in some of the most exciting parts of 1999's technology driven market," Morningstar wrote in an analyst's note in December 1999.
The fund, originally called Fidelity Aggressive Growth, more than doubled in value in 1999, Morningstar data show. The manager who produced those results, Erin Sullivan, left Boston-based Fidelity Investments in February 2000 to run a hedge fund.
As technology shares fell during the next two and a half years, Robert Bertelson managed the fund.
Failure to Adjust "It was a classic case of a manager not changing his stripes," said Jim Lowell, editor of Fidelityinvestor.com, a newsletter, in a telephone interview.
Bertelson, who currently manages the $4.03 billion Fidelity Independence Fund, faced "tremendous challenges" early in the decade, Sophie Launay, a Fidelity spokeswoman, said in an e-mail, because he took over the fund in 2000 at the peak of the market for aggressive growth stocks. Launay said Bertelson had a "solid long-term track record."
The fund underperformed about three-fourths of its peers in the most recent five years, Morningstar data show. Fidelity Growth Strategies has been managed since 2005 by Steven Calhoun. It gained 41 percent in 2009, better than 73 percent of similar funds, Bloomberg data show.
Launay said Fidelity funds outperformed about two-thirds of their peers in the past 10 years.
Vanguard Too Late Vanguard U.S. Growth underperformed rivals in 1999 because it owned less technology than its peers, Morningstar wrote in an August 2000 analyst's note. Between August 1999 and August 2000, the fund boosted its technology holdings to 56 percent of the portfolio from 35 percent, according to the note.
The fund fell 70 percent during the market sell-off that ended in October 2002, Bloomberg data show. It now oversees $4 billion.
"The fund has suffered from lousy stock-picking; there's no other answer," said Daniel Wiener, editor of Independent Adviser for Vanguard Investors (FDEGX), a newsletter, in a telephone interview.
John Woerth, a spokesman for Vanguard Group Inc., said in an e-mail that the fund's technology holdings early in the decade continues to "weigh on its long-term record." The fund beat 56 percent of its peers over the past three years, Morningstar data show.
The fund has been managed for Vanguard since 2001 by AllianceBernstein Holding LP, a New York investment firm, Woerth said. William Blair & Co. of Chicago has run a portion of the fund since 2004.
John Meyers, a spokesman for AllianceBernstein, declined to comment. John Jostrand, who works on the fund for William Blair, and Tony Zimmer, a spokesman for the company, did not respond to e-mails and phone calls seeking comment.
Vanguard, based in Valley Forge, Pennsylvania, is the largest U.S. manager of stock and bond funds, with $1 trillion in assets, excluding money-market funds, Morningstar data show. Boston-based Fidelity manages $721 billion.
The following is a list of the 10 worst-performing U.S. diversified stock funds based on returns from Jan. 1, 2000 to Dec. 28, 2009:
Fund AUM % Change
Fidelity Growth Strategies $1.9 -67 percent
Vanguard U.S. Growth $4.0 -50 percent
Putnam New Opportunities $2.6 -46 percent
Columbia Select Large Cap Growth $1.7 -41 percent
SEI Large Cap Growth $2.1 -40 percent
MFS Growth $2.1 -39 percent
Janus Enterprise $2.4 -38 percent
Putnam Investors $1.6 -37 percent
Seligman Growth $1.4 -37 percent
AIM Constellation $3.1 -37 percent
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